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Kotak Mahindra Bank to raise $825 mn for M&As, biz expansion

30 March, 2017

Kotak Mahindra Bank, India’s fourth-largest private-sector lender, plans to sell shares worth as much as $825 million (Rs 5,350 crore) at the current market price to pursue acquisitions and grow other businesses.

The board of the Mumbai-based bank on Thursday approved selling 6.2 crore shares through measures including a rights issue, a public offering or a private placement to institutional investors, it said in a stock-exchange filing.

The fundraising is aimed at augmenting the bank’s capital base to pursue mergers and acquisitions, acquire stressed banking assets, grow subsidiaries, and expand its digital banking and international lending operations.

The development comes amid market speculation that the Uday Kotak-led lender could be looking at a merger with Axis Bank, the No.3 private-sector lender. However, Axis Bank had last month told stock exchanges this was “baseless and unsubstantiated”. Any deal with Axis Bank will also be difficult as state-run insurance firms own about 30% of the bank.

Kotak Mahindra Bank is no stranger to M&As; it had, in November 2014, acquired peer ING Vysya Bank in an all-stock deal worth $2.4 billion.

Shares of Kotak Mahindra Bank rose 0.36% to close at Rs 862 apiece on Thursday, but below the one-year high of Rs 885 it touched last week. The BSE Sensex gained 0.39%.

The planned fundraise comes after Yes Bank Ltd, the fifth-largest private-sector lender, raised $750 million via a share sale to institutions earlier this month.

Bad loans

The bank also has big plans for the stressed assets business, as Indian banks struggle to contain the growing pile of bad loans. The Reserve Bank of India estimates that the stressed advances ratio—which includes both bad loans and restructured debt—increased to 12.3% of total advances at the end of September 2016 from 11.5% six months before.

The bank said there were “unprecedented opportunities” in this segment, including participation in a so-called “Bad Bank” that the government has been considering to help local banks tide over the problem of growing bad loans.

In fact, the bank had last year tied up with Canada Pension Plan Investment Board (CPPIB) to invest up to $525 million in stressed assets.

Uday Kotak, vice chairman and managing director at the bank, told reporters on Wednesday that, based on the bank’s internal research, the total stressed assets in the Indian banking sector were about Rs 14 trillion ($215 billion), net of provisions made on gross non-performing loans.

He had also said that, since banks have made some provisioning against stressed assets, the loss that the banking system will have to take is roughly about 30%, or about Rs 4 trillion. This amount is 50% of the total capital base, Kotak said.

He added that two or three large, well-capitalised “bad banks” could resolve the bad loan menace and that a significant portion of the capital required could be from the private sector.

Kotak was speaking in Mumbai after launching ‘811’, a digital channel to create a bank account by using an Aadhaar-based verification system, helping customers undertake all types of digital transactions without charges.

Promoter stake

The planned fundraise will also help the bank to reduce the stake of its promoters as mandated by the RBI. The central bank, on 1 February, had asked the private-sector lender to reduce promoter holding to 30% by the end of June 2017, and subsequently to 20% and 15% by December 2018 and December 2019, respectively.

Back-of-the-envelope calculations indicate that the equity issue will dilute the promoters’ stake by roughly 3.3%.

Billionaire Uday Kotak and other promoter group entities hold a 32.11% stake in the bank after he sold a chunk of shares earlier this month to Canadian investment firms Caisse de Depot et Placement du Quebec (CDPQ) and CPPIB for about Rs 2,254 crore ($338 million).

CDPQ picked up a 1% stake in the bank while CPPIB, which first invested in the bank in 2013, now holds about 6.26%.

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Kotak Mahindra Bank to raise $825 mn for M&As, biz expansion

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